Is it time to invest in Turkey?

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There are very few consistent indicators out there in the world of investment.

The environment is ever-changing. Strategies that worked for years suddenly stop paying out. Infallible signals turn fallible. Things work. And then they don’t.

But here’s one that I reckon you can take to the bank. As soon as someone in charge starts blaming the media or short-sellers, you know that something’s wrong.

That’s exactly what’s happening right now in Turkey.

It’s never a good sign when the boss is blaming the papers or the hedge funds

Last Friday, US investment bank JP Morgan suggested that it was time to short sell the lira, after data showed that the central bank is running low on reserves with which to defend the value of the currency.

As a result, the Turkish regulator decided to launch an investigation into the bank, which it said was “misleading” clients.

This is proper banana republic behaviour. You won’t find me defending investment banks on a regular basis, but this is just an analyst’s job. And history has often shown that when an authoritarian government takes offence at criticism from a humble analyst, there’s usually a very good reason to be concerned.

But it didn’t stop there.

Long story short, the government, led by President Recep Tayyip Erdogan, told banks not to lend lira to foreign institutions. Put simply, this was to stop them from short-selling the Turkish currency. As a result, the cost of lending lira offshore overnight, soared to 1,200% – from about 22% last week (that’s 1,200% a year by the way, not per day).

So if you wanted to short the currency, you couldn’t. And it worked, briefly. But it’s not great for confidence.

The problem for Turkey is that if you make foreign investors fearful that they will not be able to get their money out of your country when they want to, then they will do two things. Firstly, they’ll think twice about sending any more money your way. Secondly, they will – when they get the opportunity – withdraw the money that’s already in your country.

Investors have driven up the price of insurance against the country defaulting on its debt (credit default swaps – CDS). Meanwhile, the yield on the ten-year bond is heading for the 20% level. And of course stocks have fallen.

So – a pyrrhic victory. The question is: what happens next?

I don’t feel comfortable investing in Turkey, which is why it’s very cheap

Turkey is one of the cheapest markets in the world right now – indeed on some measures it’s the cheapest. Normally that would have me reaching for the “buy” trigger, and I have to admit that I’m tempted. Usually when markets are this cheap, they bounce, and you make a lot of money when they recover. (I cover this in a lot more detail in my book, The Sceptical Investor).

My concern, on the other hand, lies with the unpredictability of the people in power. Could Erdogan decide that Turkey needs permanent capital controls? Or that it should nationalise various companies? Or that property rights are over-rated?

It’s already pretty clear from his ill-judged domestic interventions that he doesn’t see why he shouldn’t be able to just dictate the price of the lira, just as he’s trying to dictate the prices in the shops.

On the other hand, there are local elections in Turkey this weekend, notably in Ankara and Istanbul. He is clearly trying to ramp up support until they’re done. Could things cool down after that? Probably. And one piece of good news for Turkey is that its current account deficit “has all but disappeared”, as Marcus Ashworth puts it on Bloomberg.

Meanwhile, exchange-traded funds betting on Turkish assets are trading at levels we haven’t seen since the 2008 financial crisis. Although I’d caveat that with the observation that they were last lower during Turkey’s full-blown lira sell-off of last August.

It’s a tough one. The reason that you make money when markets are cheap is because no one else wants to touch them with a ten-foot bargepole. And that only happens when the idea of investing in a market makes you feel uncomfortable.

On balance, I think Turkey probably has further to fall. But at the same time, I’m going to keep a very close eye on it. Because I know that my own squeamishness here is a sign that there’s an opportunity in the making. (If you do decide to take a punt yourself – needless to say – treat it as a small part of your sensibly diversified portfolio).